July 31, 2011

IBD on GDP Inadvertently Explains the G-A-P in Tax Collections

Filed under: Economy,Taxes & Government — Tom @ 11:35 am

PostRecessionReaganVsObama8Qtrs0711Why isn’t the tax money rolling in like it should in a recovery (even in the current pathetic imitation of one)?

The answer to that question can be inferred from a couple of points made in an Investors Business Daily editorial on Friday (bolds are mine):

… all told, from the end of 2008 to this year, the government estimates U.S. GDP was $314 billion less than first estimated, not including this year’s revisions.

Digging down into the data shows an even gloomier picture. Per capita GDP, the ultimate measure of both well-being and productivity for a nation, today remains lower in real terms than it was in 2007.

In the second quarter of this year, average annual real output per person stood at $42,499 — still 3.3% below its peak of $43,956 in the fourth quarter of 2007.

Looked at yet another way, the Commerce Department also estimates “potential” GDP — the size the economy would be with all resources used efficiently.

In the second quarter of this year, real GDP stood at a real annual rate of $13.33 trillion. But our potential, the government says, is $14.25 trillion. So we’re missing $920 billion in GDP, and Obama’s first term isn’t over.

Call this lost potential the Obamanomics tax.

If Barack Obama and the Democrats really wanted more tax revenue, they would have chosen economic policies which would have realized most of the potential identified above (which in my opinion is understated, because it probably doesn’t take into account business innovations and expansions which didn’t happen because of regulatory overreach, tax disincentives, and the looming Obamacare nightmare). The $920 billion gap in real GDP IDB noted is expressed in 2005 dollars, so it’s really about $1 trillion in today’s dollars. If we were achieving that, extra collections to Uncle Sam could be rolling in at the rate of about $300 billion a year, which would put us in the neighborhood of where tax collections were in 2007 and 2008.

Looked at another way using the graph at the top right comparing the Reagan Era’s Recovery to Obama’s, the economy could be (really should be) about 8% bigger today (12.9% vs. 5.0%). If so, GDP in today’s dollars would be about $1.2 trillion higher, and potential extra tax money rolling in to Uncle Sam would be about $350 billion greater.

But that’s not what Obama and Democrats really want. Oh sure, they’d like the money, but what it’s really all about is punishment, redistribution, and perverse retribution against “the wealthy” (except, of course, cronies who know how to play the favors game). If it weren’t, they’d have long since chosen policies which have historically increased economic growth and taxes coming into the government at the same time. But they won’t.

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